As you look over the various tensions in global governance, it would appear none is more inflamed than exchange rates.  For some time now, the United States Administration – and Congress in particular – has obsessed over the US dollar-renminbi exchange rate and more broadly the Chinese governments unwillingness to provide a freely floating currency.  Many in Congress, notably Senator (D-NY) Charles (Chuck) Schumer have declared that the Chinese government is manipulating the currency – in this case undervaluing the currency – to gain an export advantage.  Paul Krugman, the eminent economist and New York Times columnist, has urged strong action including the imposition by the United States of punitive tariffs to offset the ‘subsidy’ incurred through the manipulation of the renminbi.  As Krugman describes the current global economic circumstances in his Friday op-ed entitled, “Taking on China”, (NYT, September 30, 2010) 

In a time of mass unemployment, made worse by China’s predatory currency policy, the possibility of a few new tariffs should be way down on our list of worries. … meanwhile, the Chinese government is keeping the value of its currency, the renminbi, artificially low by buying huge amounts of foreign currency, in effect subsidizing its exports. And these subsidized exports are hurting employment in the rest of the world.

Notwithstanding repeated promises to American officials and the President himself – most recently at the margins of the UN General Assembly meetings where the President and Prime Minister Wen Jiabao discussed currency, the Chinese government has been notably unwilling to let the renminbi appreciate.  Since June the renminbi has risen against the dollar just under 2 percent.  Meanwhile Chinese officials have worried over the decline in the Euro and how that makes China’s goods less competitive.  And last month the Japanese government waded into currency markets  - for the first time in 6 years – to suppress the level of the yen, arguing that Japan was losing competitiveness against China. 

We are fast approaching – though I suspect we haven’t yet reached  – the emergence of a new currency system structure.  And it doesn’t appear to be very pretty. 

What we seem to have is an international currency system where major currencies are open to being visibly manipulated to gain advantage against what is declared an unfair manipulation of another major currency.   It is slightly hard to fathom that this is the way the international currency system is headed given the Great Depression experience and the enormous damage that competitive devaluation had on the international economy in the 1930’s. 

And where is the International Monetary Fund?  The IMF was created in part to avoid just such a system and the outbreak of such detrimental behavior.  As Berkeley economist Barry Eichengreen recently wrote, the IMF has a “mandate to oversee the “effective operation” of the international monetary system.” (Global Asia, Vol. 5, No. 3, Fall, 2010)   In the IMF Articles of Agreement the member countries in Article IV agreed, among other things,

 to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates.  

Further the Agreement mandates at Article IV, Section iii that each member shall:

avoid manipulating exchange rates or the international monetary system … to gain an unfair competitive advantage over other members; …

But the IMF has had no visible impact to date in dealing with the question of exchange rates.  Meanwhile, this immanent system has no norms or rules.  There is no guidance over how to move exchange rates avoiding competitive devaluation.  This ‘system’ could prove to be ugly very quickly.

The G20 needs to – as early as Seoul in November - meet head-on the emergence of this system.  If the IMF is ‘frozen in place’ then the G20 leaders must address an unstable system.  The G20 must devise some rules on what constitutes ‘manipulation’ or to insist on prohibitions against seeking unfair advantage through devaluation. The rise of protectionism has not been banished by the G20 leaders.

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